What is Large Cap Stock?
Large-cap stocks refer to stocks of large companies who are having value also known as the market capitalization of $10 billion dollars or more and these stocks are less risky as compared to others and are stable and they also pay a dividend and best return and it is safest option to invest.
Market Capitalization is the wallet share the firm is having in the industry and is calculated by multiplying the number of a company’s shares outstanding by its stock price per share. Stocks are generally classified as:
- Large Cap (Greater than $10 bn)
- Mid Cap stockMid Cap StockMid-Cap stocks are the stocks of the companies having medium market capitalization. Their capital lies between that of large and small cap companies and valuation of the entire share holdings of these companies range between $2 billion to $8 billion. (between $2bn to $10 bn)
- Small-Cap (between $300mn – $2 bn)
Top 20 Large Cap Stocks in the US
|S. No||Name||Large Cap ($ bn)|
|6||Alibaba Group Holding||484.7|
|9||Johnson & Johnson||333.1|
|11||Royal Dutch Shell||302.7|
|12||Bank of America||297.1|
|14||Royal Dutch Shell||291.3|
Benefits of Investing in Large Cap Companies
Some of the important reasons to invest in Large Cap companies are:
- Large Cap companies are generally very stable, making them a safer investment opportunity compared to others. They are the top businesses in their respective industries and can be considered as Market leaders. However, their stock prices may not grow as fast as other smaller companies making them less suitable for all kinds of investors. It is due to limited opportunities to grow after occupying a successful position in the industry.
- Large Cap stocks are generally preferred in case of business cyclesBusiness CyclesThe business cycle represents the expansion and contraction of the economy that occurs due to ups and downs in the gross domestic product (GDP) of a country. It is experienced over the long term and goes parallel with the natural growth rate. going through turbulent times. It is because they are a safer investment and can comparatively withstand a slow down without the threat running out of business. It does not mean they are immune to recessions but have a better ability to handle difficult economic scenarios.
- Generally, these large-cap stocks pay a dividend regularly as the companies know the stock probably will not appreciate in value as swiftly as a Growth company. It offers another source of income for conservative investors. It is very useful for investors when bond yieldsBond YieldsThe bond yield formula evaluates the returns from investment in a given bond. It is calculated as the percentage of the annual coupon payment to the bond price. The annual coupon payment is depicted by multiplying the bond's face value with the coupon rate. are low. These companies may be profitable but do not have opportunities to grow. Accordingly, investors have to be compensated for the stagnant stock price and have earnings in the form of a dividend.
- These large-cap stocks are more liquid, making them easier to exit at any point in time. These firms are used as Core long-term investments in a portfolio due to the above factors. Thus, they can occupy a significant section in the allocation of a client’s investment depending on their financial objectives and risk appetiteRisk AppetiteRisk appetite refers to the amount, rate, or percentage of risk that an individual or organization (as determined by the Board of Directors or management) is willing to accept in exchange for its plan, objectives, and innovation..
Rally of Large-Cap Stocks
The Large Cap stocks of the US have been outperforming since 2013 and are expected to continue in the short-run. The reasons for it are:
#1 – Large Cap Stocks are more Internationally oriented and gain from USD weakness
The S&P 500 has been outperforming the Russell 2000 along with the weakening dollar in 2017. It is due to the USD depreciation offering large MNC’s a boost through:
- Foreign Sales and Exports
- Demand Creation
- Effects of Positive Accounting translation
- Increased Competitiveness
Sub-par domestic economic outcomes and improving foreign prospects suggest US investors should stay focused on the S&P 500. Geographic revenue analysis states that the Large Cap companies of the US have foreign exposures as 30% of the S&P 500 revenues come from outside the US.
#2 – Earnings from Large Caps Companies Benefit from Lower Effective Corporate Tax rates
Incentives and credits can create a difference in how much a company pays in taxes by effectively lowering a firm’s taxable income. To be eligible for these tax breaks requires spending a significant amount of money, which may not be suitable for smaller companies and start-ups. Large Cap stocks can reduce their financial resources in several ways since a lot of money is spent, which may not necessarily be justified.
The US Internal Revenue Service doesn’t tax income earned in foreign countries, and many of them have lower Corporate taxCorporate TaxCorporate tax is a tax levied by the government on the profits earned by a company at a fixed rate each year and is calculated in accordance with specific tax regulations. rates than the US. It makes them outsource many of their functions to foreign countries, which in turn proves to be a cheaper option.
#3 – Tighter US Monetary Policy and a Flatter Yield Curve Spurs Large Cap Leadership
The US Treasury yield curveYield CurveThe Yield Curve Slope is used to estimate the interest rates and changes in economic activities. It is a plot of bond yields of a particular issuer on the vertical axis (Y-axis) against various tenors/maturities on the horizontal axis (X-axis). is one of the leading economic indicators. A direct relationship existed between the yield curve and the performance of the Russell 2000 relative to the S&P 500. A steepening curve today indicates positivity for higher-beta segments of the equity marketThe Equity MarketAn equity market is a platform that enables the companies to issue their securities to the investors; it also facilitates the further exchange of these stocks between the buyers and sellers. It comprises various stock exchanges like New York Stock Exchange (NYSE).. Conversely, a flattening curve now points to more challenging economic conditions down the road and bad news for economy-sensitive segments of the stock market.
When the FED commences normalizing the monetary policy, raising of interest rates, flattening the curve, and not encouraging to take risks, the mature and the established firms in the US equity tend to benefit, which reflects the current scenario in the US.
This article has been a guide to what are large-cap stocks. Here we list the top 20 large-cap companies along with the benefits of investing in large-cap companies. You may also have a look at these articles below to learn more about Corporate Finance –